Online exclusive: Have more questions about transition planning? Read The Monitor Group's answers to the most common business transition questions.
It still smarts when Terri Getman recalls the financial disaster that befell her family because her father didn't plan ahead. He owned a minority stake in a closely held Georgia paper-making machinery manufacturer, but died suddenly six months after the business was launched.
With no written plan outlining his ownership rights, the family was cut out by the other partners. These owners later sold the business to a German firm for a handsome profit, pocketing the funds themselves. "We did 11 years of litigation to get nothing," Getman ruefully recalls.
Her story is far from unique. A study of more than 1,400 business owners conducted last April by investment consulting firm The Monitor Group in McLean, Virginia, revealed that more than 82 percent had no written plan describing what they'd like to see happen when they leave the business.
The result is often lost income to the founder or his or her heirs, and a business that doesn't thrive or even survive after the founder's departure. Consider two more tales of transitions gone wrong.
A story in the Puget Sound Business Journal explains that when Wilson Products Inc. owner Kenneth Wilson died unexpectedly in 2003, his three daughters found themselves in charge of Wilson's $12 million aircraft-parts business. All three had grown up around the Auburn, Washington-based company but were never trained to take the helm.
With the aerospace industry going through rapid change, the business floundered, filing for bankruptcy last year. With $20 million in orders on the books, the Wilsons couldn't find a buyer, and the company's assets were auctioned.
According to the St. Louis Business Journal the second-generation owner of Missouri frozen custard company Southern Products Co., fought with his son Mark Dorsey over how the business was run. So the younger Dorsey left in 2004, got his MBA, and started a competitor, Pacific Valley Dairy Inc.
Southern Products, which had $100 million in annual sales, went bankrupt in 2005. The winning bidder at the 56-year-old company's bankruptcy auction was Pacific Valley Dairy, which paid less than $3 million for it.
With so much at stake, why do so few entrepreneurs plan for their departure? Such planning brings up a host of uncomfortable issues, including death, the company's true value, and often, touchy family relationships.
"People know they have to prepare themselves, their family and their business to have a well-planned and well-valued sale transaction," says The Monitor Group president Glenn Kautt. "But most aren't doing it."
Experts say even owners who don't have a clear sense of when or how they'd like to leave their business can get the process rolling with a few basic steps.
1. Write Down Your Wishes
Begin by mapping out what you'd like to see happen when you depart. Then create a timeline for when you'd like that to occur, says Trudy Nearn, owner of Sacramento, California, estate-planning law firm Generations.
"People either haven't thought about it at all, or they have unrealistic expectations," she says.
She recalls one client who wanted to leave her day-care center to one daughter while leaving the land under it to another daughter. The owner assumed this second daughter would be willing to charge the day-care center affordable rent.
Nearn pointed out that the land-owning daughter would want to maximize the value of her inheritance. So instead, one daughter inherited the business and land while the other got an insurance policy of equal value.
An important part of planning is envisioning what the owner wants to do after departing the business, says University of Massachusetts Family Business Center director Ira Bryck. Some fear they'll be unhappy and bored once they relinquish their position. In fact, less than 17 percent of respondents in the Monitor study imagined they would retire after leaving their business. More than 45 percent said they planned to start another company. Still others relinquish control but stay on in smaller roles. In any case, having a plan for your next chapter can be the impetus to move forward.
2. Start Documenting
If you can't spell out company policies and procedures, your company may not be salable, says Jerry Zyskowsky, a volunteer counselor for SCORE in Seattle.
He recently worked with a family where the mother was a silent partner with her two sons in a lucrative equipment-evaluation firm. They wanted to sell, but after 18 months of trying to document company operations, he recalls, all the sons came up with were a few spiral note-books filled with hasty scribbles and handwritten notes.
"The company was useless unless you had the brains of these two sons," Zyskowsky says. "There were no means to transfer ownership."
Sometimes a business entails holding crucial licenses or skills. Attorney Stuart Dorsett of Ward and Smith in Raleigh, North Carolina, worked with one heating and cooling company that was nearly ruined by a documentation snarl after the owner died unexpectedly. The company's work required a state license, which demanded extensive training and testing. The owner was the only person at the company who was licensed. When he died, the business had to close its doors the next day.
"We were able to rescue the situation by finding a semiretired guy who was licensed and coaxing him back to work, while the family maneuvered to sell the business," Dorsett says. "But potentially, it was just a disaster."
3. Select and Groom Successors
Many business owners don't leave enough time to properly prepare their intended successor, says David Paradise, president of the Family Business Resource Center in Newton, Massachusetts. They forget that training may reveal that their first choice isn't going to work out, forcing them to restart the process with a new person.
Business owners need to assess their heir apparent's skills and design a training program to beef up their weak points. If the likely heir has been a marketing vice president, for instance, he or she may need extensive training in logistics or handling customers, vendors or bankers. According to Paradise, "There should be a formal training process with specific criteria written down."
One third-generation business owner who benefited from an extensive training program was Laura Michaud. She stepped into management at hearing-aid company Beltone Electronics Corp. in 1980. Now an Elmhurst, Illinois, business consultant after selling Beltone in 1997, Michaud recalls that as part of her management training, her father plunged her into all aspects of the business, even asking her to make a hearing aid.
"I learned to appreciate other people's jobs," she says. "You need to work in all areas of operations."
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.